It is a rarity to find an entrepreneur who is committed to financial forecasting. The reason why this is the case is that many of them prefer to develop and run their business. Forecasting can take a lot of time, but in the long-run, it will serve to benefit the organization.
You will attract more investors as a result of this and develop long-term strategic plans. However, it will only work if the forecasts are fairly accurate. If you miss your mark in forecasting, you could very likely upset investors, mismanage your expenses, or even run out of money.
Your only recourse is to follow the steps laid out below if you are to make accurate forecasts.
1. Get Ready For The Worst Of Times
You should be ready to face your business in the worst of times but also opt for the best as well. In the short-term, you should look at the month-to-month growth rate in the previous year so that you can predict the revenue in the coming months.
2. Use Multiple Scenarios
Forecasting growth does not mean that you shouldn’t make room for the worst case scenario. It is important to keep in mind that anything can happen. That is why entrepreneurs resort to using highly conservative estimates. In truth, you should not focus on only one of the two scenarios.
In fact, you should conserve your predictive energy on at least two scenarios; one being optimistic and the other being cautious. You will need to employ this tactic, especially if there is uncertainty surrounding huge factors that could affect your business. Some of them include; new competition, government regulations or even the overall economic growth.
3. Understand Your Company’s Key Performance Indicators
The key to forecasting has to do with understanding your company’s key performance indicators. You must start from scratch and use revenue as well as cost drivers whenever possible. A cost or revenue driver is the unit of activity that results in the change of revenue or cost.
Let us assume that you run a business that sells shoes. The revenue driver from the sales front is the number of shoes that you sell and the cost that you put on them. The cost driver from the cost front is the amount of material and the cost of the material which makes the shoe.
The other cost drivers could be the number of hours that it takes to make a single shoe and the wage of the employees producing the shoes. The cost drivers enable you to turn your products and services into smaller components and attach a price to them.
You will then be able to make forecasts based on the information you have on each cost driver on a monthly, quarterly or yearly basis.
4. Develop A New Kind Of Forecast
We must never let our annual forecasting go without notice. It is especially not wise to do so with uncertain economic times. It should be wise to push your annual forecasting to later in the year. For example, if you conduct financial forecasting in August, then consider doing it in November from now on.
Better yet, you should think about forecasting on a monthly basis. It may take a lot of time, but it is necessary at times.
5. Plan For Discounts Beforehand
A retailer has to make two primary discounts; promotional, which is during the season and clearance markdowns as the season ends. Planning for this goes in line with planning sales and inventories, especially if you’re going to use retail as a unit of measure.
If you’ve planned the costs by month, then it will be easier to calculate how much inventory to bring in each month.
About Writer: Scarlett Erin works as a Financial Consultant for AssignmentStar.co.Uk. With an illustrious career in keeping up the financial management of organizations, she now takes out time for blogging to impart her knowledge to entrepreneurs.